Killing Banking Rules Will Invite a Whopper of a Recession

MOST POPULAR

The vote in the House of Representatives to dismantle Obamacare was not the only attempt to undo key legislation from the Obama years that occurred last Thursday. Though it mostly went unnoticed, the House Financial Services Committee voted in favor of the Financial Choice Act. This legislation would substantially weaken the Dodd-Frank financial reforms.

If the Republicans are successful, and that is not assured at this point for either piece of legislation, it will increase economic insecurity for most households. For example, Obamacare has significantly reduced medical bankruptcy, a worry for families who do not have health insurance. If Obamacare is repealed, those worries will return for tens of millions of households and become a reality for many of them.

As for repealing Dodd-Frank, consider this statement by Treasury Secretary Steven Mnuchin. Speaking at the Milken Global Conference last week, which is attended by key people in the financial industry, he boasted, “You should all thank me for your bank stocks doing better.”

What he is saying is that increasing the risk of another financial meltdown and a large recession, which would once again be paid for mainly by all the people who lose their jobs, homes, retirement savings, and so on rather than the wealthy interests benefitting from the change in policy, is worth making bank stocks do better. If the Financial Choice Act is passed, the risk of a deep and prolonged recession, which would once again hurt millions and millions of households, will go up.

Even if Republicans are unsuccessful in their attempts to get rid of Obamacare and Dodd-Frank, these policies are representative of a broader agenda that will make life harder for the poor and the working class. For example, the large tax cuts that are part of the Republican health care plan are likely to be enacted one way or another, and the resulting increase in government debt will give Republicans the excuse they need to weaken social insurance programs that protect people from large economic risks.

In 2006, Jacob Hacker published The Great Risk Shift. In this book, he argued persuasively that there had been a substantial decline in economic security over the previous three decades. The reasons for this were numerous, including declining retirement security due to the shift from defined benefit to defined contribution plans, the erosion of employer provided health care and other job benefits, the threat of jobs moving offshore, the commodification of labor, and more income variability for working class households.

During the Obama years, this shift abated somewhat and was even reversed in areas such as the risks associated with not having health insurance. But The Great Risk Shift is back if full force.

Essentially, Republicans believe that the wealthy, who face few if any of the financial risks faced by those who aren’t so fortunate, should not have to contribute to the social insurance funds that the less fortunate rely upon. People should take care of themselves.

But there are some risks that people face – risks they have no control over – that are too large for individuals to cover on their own. And even if they could somehow save enough for a very rainy day, it’s a waste of resources for everyone to save enough to fully offset the risks they face. Fire insurance provides a good example. Every household could try to save enough to cover the cost of rebuilding after a fire, and perhaps some could manage to do so. But that would require everyone to save a substantial portion of his or her income. It’s much better for everyone to pool small contributions into an insurance fund, and then allow the unlucky few that have a fire to draw from it.

Social insurance is the same. Households face all kinds of risks that they have no control over such as sudden and unexpected job loss due to offshoring, technological change, changes in the public’s taste for goods, a sudden and costly health crisis, or outliving savings in retirement. As a society, we can pool our resources together into social insurance funds such as unemployment compensation, food stamps, health insurance, and Social Security, and then allow those in need to use the pooled savings.

But why should the wealthy have to contribute to these funds? They have more than enough to cover health and retirement costs, or can at least purchase the best possible insurance, and they have no worries about job loss.

Setting aside the few that will lose their fortunes and perhaps be grateful for the social safety net, I think it’s important to remember the contribution of all the workers who design, manufacture, and distribute the goods and services that allowed the wealthy to accumulate such large fortunes. The wealthy didn’t do it alone. It depended critically on the hard work that so many people do each day, and the schools, roads, bridges, airports, sewage systems, water systems, electrical grids, and so on that society created.

No matter how much the wealthy forget this once they reach the top, we all did it together. When the people who have worked so hard each day to make such large fortunes possible face economic hardship, the wealthy have an obligation to help instead of scapegoating immigrants, environmental and financial regulation, high corporate tax rates, and unions to avoid having fingers pointed at them.

The decisions the wealthy make to move factories offshore, replace people with machines, or discontinue a product line are responsible for much of the insecurity and hardship workers face. Those decisions help the economy function more efficiently and grow more rapidly, but they also throw lives into turmoil. It’s not too much to ask that wealthy – who have reaped most of the benefits of economic growth in recent decades – help to alleviate the difficulties these decisions cause for the unlucky workers who are hurt by these decisions.

University of Oregon macroeconomist Mark Thoma writes primarily about monetary policy its effect on the economy. He has also worked on political business cycle models. Thoma blogs daily at Economist’s View.